(May 11, 2010) — A recent study by MetLife Assurance Limited shows efforts by schemes to develop and implement risk management are hindered as a result of divergent approaches to risk between pension trustees and scheme sponsors.
MetLife Assurance’s UK Pension Risk Behaviour Index warns that while trustees and scheme sponsors focus on separate, yet potentially equally important, risks, this “divide and conquer” approach may pose risks to pension schemes, thwarting efforts to develop and implement holistic risk management solutions, said MetLife Assurance Limited CEO Dan DeKeizer to ai5000. The study warns the approach could end up costing a DB pension scheme money, waste trustee and management time and cause potential harm to the scheme sponsor’s reputation, urging sponsors and trustees to talk with each other, DeKeizer said.
With many schemes currently in a deficit position and a growing trend of schemes closing to new members, the impact of pension schemes on the economic landscape of the UK and the financial health of its citizens remains very significant, the study said. Currently, there is still an estimated £1 trillion of DB liabilities which must be managed. “A truly holistic view of risk management on the part of both trustees and scheme sponsors requires both sides to fully assess and prioritize all risks, even those for which they are not primarily responsible,” said DeKeizer in a statement. “Our inaugural study should encourage scheme sponsors and trustees to communicate regularly about a full range of issues that affect their schemes, especially as they face increasing risks ranging from the quality of member data to scheme governance and the employer covenant.”
The study found the top risk factors for trustees by percentage and ranking include the following:
- Investment Management Style (29%)
- Asset Diversification (28%)
- Asset and Liability Mismatch (28%)
- Measurement of Technical Provisions/Liabilities (28%)
- Investment Risk Profiling (27%)
Most important risk factors for sponsors:
- Longevity Risk (31%)
- Measurement of Technical Provisions/Liabilities (30%)
- Employer Covenant (29%)
- Scheme Governance (29%)
- Inflation Risk (27%)
MetLife’s study of 89 UK trustees and scheme sponsors analyzed how trustees and sponsors viewed 18 investment, liability and business risks that affected their pension schemes, and assessed how well they believed they were managing those risks. The study was conducted from December 2009 through February 2010.
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